Introduction to Chapter 3.02

Quick Summary: Focusing on raising money at the start is the wrong approach.

Abstract:

The articles in this chapter discuss the first issues that an entrepreneur faces when they make the commitment to start their business. In most cases, an entrepreneur first thinks about raising money to start their enterprise. This is exactly wrong and will result in lots of wasted time and effort and be very discouraging. Instead, a fraction of that time should be spent on gaining an understanding of your business and what you can expect from potential investors and what they will demand of you.

The outcry from many first-time entrepreneurs is: “I know what to do; all I need is money!” Unfortunately, in virtually every case this is simply untrue. When potential investors hear this comment, they don’t walk away, they run away as fast as they can. Even if the idea has merit and the entrepreneur seems to have a lot of potential, giving money to someone at an early stage and with their confidence is a virtual recipe for disaster. It will, most probably be a very expensive lesson for everyone involved.

Instead of asking for money, during the very early stages, the entrepreneur’s time would be much better spent on refining their business model and thinking carefully about how much money they will need (in stages) and what avenues are the best to purse when the time is right. The articles in this chapter address those issues. One thought that entrepreneurs need to always keep in mind is that their focus is getting money INTO the company NOW, while investors are focused on how they will get their investment OUT OF the company and WHEN.

Chapter Sections and Summaries

Timing and Strategy

Sports teams scrimmage and play pre-season games before they “play for keeps”. Entrepreneurs need to do the same thing before they approach investors. Once an investor says “No”, it is virtually impossible to turn them around. So, carefully plan both the timing and your approach.

Investor Selection

Talking to investors is a great example of when more is less! An entrepreneur’s time, not funds, is the most precious commodity they have. Use that time wisely but carefully, filtering potential investors; use a rifle, not a shotgun.

Financial Model

Excel ™ and other similar spreadsheet programs are both a blessing and a curse to an entrepreneur. They make the mechanical process of building a financial model easy, but it is equally easy to get tied up in the “numbers” and lose sight of the business fundamentals and, most importantly, the basic business assumptions.

Evaluation and Valuation

Business valuation discussions for pre-revenue companies is nothing more than a sophisticated version of the bar game of liar’s poker. The value of a pre-revenue business is nothing more than a person’s opinion and can be expected to vary widely. Entrepreneurs come up with high numbers and investors come up with low numbers. All that matters is what an investor is willing to use.

Chapter Articles and Summaries

Introduction to Approaching Investors

Focusing on raising money at the start is the wrong approach.

You Can't Raise Money With An Idea

Demonstrable market acceptance is the key to raising money; not a good idea.